The products, under which oligopolistic market structure is sold, can be varying or identical. For example there are different types of gasoline available, yet the quality or source of the product is not very different and they are said to be identical. This is an aspect of oligopolies as there is no reason for identical goods not to be in there. Identical goods take part because the firms see that the specific need of the consumer is good-X and the two companies produce that. Different goods take part because the oligopolies (as well as other market structures) recognise the general need of the consumer and the firms tackle it differently with different products.
The supernormal profits made by oligopolies are ones which can benefit in the long run. This means that the profits in the short-run can be normal or even sub-normal in some cases. The normal profits are run when the company wishes to flush out all the smaller companies quickly. This was seen in the early 1990’s with the computer businesses. However when an oligopoly produces at subnormal profits this is when the oligopoly wishes to flush out competing oligopolies.
The price stickiness is an important factor allowing the discovery of the kink-demand curve. This is where demand is relatively elastic and then at one specific point, becomes inelastic (fig.1). The elastic part has to do with the fear of oligopolies thinking that if they raise the prices of their product then for some reason their opposition will not. The inelasticity occurs when oligopolies believe their rivals will not cut prices when they do. The firms usually produce at point A, as this is where the optimum output is set. This optimum is what it is because it is seen as the safe point for an oligopoly to produce at. (This is in a non-collusive oligopoly, important for later.)
Fig.1
This is the kink diagram. It shows where oligopolies choose their output. The fewer the firms the smaller the bend in the line.
The fact that there are few firms at the top of the ladder speaks for itself. There are a few big firms at the top with a lot of control over the market whether or not they act under collusion or not.
The non-price competition in an oligopoly is a very important aspect, as it allows us to look at the oligopolies future plans as a firm. To be an oligopoly is considered extremely high ranking as the company dictates the price and benefits from the consumer’s lack of ability to avoid the consumption of such goods. There is however one thing that oligopolies would rather be than itself. This would be a monopoly. This is complete control over the market, and no kink-demand curve as the competition is none and therefore the firm cannot worry about whether or not to increase its price. The non-price competition works towards this and involves the getting rid of all competitors. This would include not only the small firms but also the larger firms.
The interdependency of firms is seen as yet another characteristic joining the firms at the top. Interdependency involves the actions taken by one firm and how it greatly affects the well being of another firm. This can occur when collusion of a group of companies competes with another collusive group, or it could be between two firms only. The main concept is to illustrate how sensitive the market is and how the oligopolies are extremely dependant on the others actions. The interdependency of firms can also be seen in the kink-diagram.
It is generally accepted that due to the small number of firms in the industry, the firms are generally price makers or seekers. However there can also be a price leader and price followers, this engages itself in the games theory and also shows how due to all the firms following the leader, they in effect become price takers.
Collusion in the market structure has a lot to do with oligopolies in general, moreover all other market structures. This is because the aim of an oligopoly is to reduce the number of small-time firms in the industry by sticking together with other big guys at the top.
This can be direct collusion. This is when the companies make agreements and have rules they stick to until the goal of the collusion is reached. This is mostly called a joint cartel. This in most countries is illegal and for good purposes. It involves the firms participating producing separately but acting as one firm in price and output. (Fig.2)
Fig.2
This is the model of a cartel. The average cost curve goes down and the average revenue goes up.
Tacit collusion is when the industries involved try to look at each other’s predicted price determination and output. By doing so they can put their prices at that point as well forming a weaker less stable version of the direct collusion. This is quite unreliable as any change in price from any one firm in an oligopoly is very drastic and has extreme effects on the market.
Introductory Economics – Sixth edition – G F Stanlake and S J Grant – 1995 – pg.184
http://www.howardcc.edu/social_science/micropdf/unit-8.jb.pdf